This would be 'impossible' if profit margins were under pressure

We're in the midst of
earnings season, a period of time during which companies
everywhere reveal tons of information about their industries and
the environments in which they operate.

This season, investors and analysts will be laser-focused on any
information regarding impacts from the strong dollar, gains and
losses from tumbling energy prices, and demand fluctuations
caused by the slowdowns in the US and China.

One item that hasn't gotten much attention lately is corporate
profit margins, which are
near record highs. Since the financial crisis, companies have
been cutting operating costs, trimming debt, and increasing
exposure overseas — all actions that have boosted margins. But as
the bull market and economic recovery have aged, we have heard
more and more that margins are
topping out or likely to
revert to some long-term average or even collapse.

"For several years now, there has been an increasingly vocal
group of investors and academics arguing that US corporate
profitability and productivity has peaked," Parker wrote in a
research note on Monday. "We disagree and would point to this
quarter's EPS results as yet another counterexample to what we
argue is an over-reliance on irrelevant historical comparisons."

Parker notes that while profit growth has been exceeding
expectations during this earnings season, revenue growth has not.
Generally speaking, when earnings growth is outpacing revenue
growth, profit margins are actually expanding.

Here's FactSet's John Butters on Friday with some more color:

Overall, 201 companies in the S&P 500 have reported earnings
and revenues to date for the first quarter. On the earnings side,
73% of the companies have reported actual EPS above the mean EPS
estimate and 27% of the companies have reported actual EPS below
the mean EPS estimate ... However, on the revenue side, 47% of
the companies have reported actual sales above the mean sales
estimate and 53% of companies have reported actual sales below
the mean sales estimate ... Due in part to more companies
missing sales estimates than beating sales estimates, the blended
sales decline is larger today (-3.5%) compared to the start of
the quarter (-2.6%). On the other hand, due in part to more
companies beating EPS estimates than missing EPS estimates, the
blended earnings decline is smaller today (-2.8%) compared to the
start of the quarter (-4.6%).

"That is an impossible combination of data if margins were under
pressure!" Parker said. "While the absolute earnings upside
largely reflects the 'beat and guide lower' that occurred last
quarter, the revenue weakness coupled with the large earnings
beat relative to consensus is the key to assessing margins."

"Impossible" may be a bit of an exaggeration. Nevertheless, it's
an interesting observation.

For now, it looks like the profit-margin debate will drag on a
little while longer.